Surplus of worry over national debt

President Obama, who addressed the growing debt in a speech Tuesday, inherited a huge deficit. The administration estimates $1 trillion-plus shortfalls through 2011, followed by $700 billion-plus shortfalls through 2019.

AS OF TUESDAY, the nation's total national debt was nearly $12.1 trillion, according to the National Debt Clock on Sixth Avenue in New York. As of August, publicly held debt — owed to investors both at home and abroad — was $7.9 trillion, according to the Office of Management and Budget. The difference between the two amounts: Total debt includes money held by government accounts, such as Social Security and Medicare.

Seattle Times staff

WASHINGTON —

The boiler room of the ship of state is a sterile chamber on the ninth floor of an unremarkable office building in downtown Washington. Half a dozen staffers sit at computer monitors, staring at incoming data. A voice squawks over an intercom: "Five minutes to go!"

This is the auction room of the Bureau of the Public Debt. The United States is going to borrow $31 billion on this particular morning — Tuesday, Dec. 1.

The instrument in play: a Treasury bill that gives investors a place to park money for four weeks with minimal risk and minimal return.

The bidding closes at 11:30 a.m., precisely. The deal is done, instantly, electronically.

"It happens in seconds. Boom. We have 31 billion, they have their securities," said Keith Pallas, the auction manager.

Debt is the essential fuel for a superpower that spends billions of dollars more than it receives in tax revenue — every day. The job of the debt auctioneers is to keep things humming smoothly. It's a boring process, but maybe not forever. When adjusted for inflation, the United States' publicly held debt is nearly $8 trillion. That number could more than double in a decade. The projected growth of the federal debt is widely viewed as unsustainable. It's unlikely that the nation will ever default, but neither is that any longer unthinkable.

President Obama, who addressed the growing debt in a speech Tuesday, inherited a huge deficit. The administration estimates $1 trillion-plus shortfalls through 2011, followed by $700 billion-plus shortfalls through 2019.

How much is too much?

Whopper budget deficits for so many years will mean that the cumulative debt will creep up as a percentage of the nation's gross domestic product (GDP). How much debt the country can handle is debatable. The problem is that, if investors believe the United States isn't fiscally responsible, they could start demanding much higher interest rates when they bid on Treasury securities. The feedback loop could get ugly. The nation could have to borrow hundreds of billions just to pay interest. This has been touted as a classic path to irreversible national decline.

"Right now, this year, we have 1.6 trillion in debt coming due. That's roughly twice individual income-tax revenue. Our only plausible strategy for paying that back is to borrow more money," said Leonard Burman, an economist at Syracuse University.

Under some grim scenarios, the cumulative debt of the United States could rise to several times the annual GDP by midcentury. David Walker, a former U.S. comptroller who has long thundered about unfunded government obligations running to the tens of trillions, recently testified before Congress that because of long-term entitlement obligations, "our total federal financial hole is about $10 trillion more than the current estimated net worth of all Americans and the gap has been growing."

But there are those who say such fears are wildly overblown. Investors worldwide still consider the United States a safe bet. The collapse of the market in exotic derivatives, such as mortgage-backed securities, has made dishwater-dull Treasury instruments all the more attractive.

Worse after WW II

The country had greater debt, as a ratio to its economy, at the end of World War II but dug itself out of the fiscal hole and firmed up its status as a global superpower.

Indeed, federal debt is nothing new. Along a hallway at the bureau are framed Treasury bonds and notes going back as far as 1799, when a certain John Clarke of Yorkshire, England, bought a $5,000 bond from the former British colony. In July 1864, President Lincoln invested $100 in a bond that had his picture on it. Foreign investment always has been the norm: A handwritten ledger from 1818 shows that of the $99,106,825.58 in national debt, foreigners owned $25,444,047.75 of it, or about one-quarter.

Liberal economists, most prominently Nobel laureate and newspaper columnist Paul Krugman, have contended that budget deficits at the moment are actually too small. The first stimulus package was too stingy to make much of a difference, they say, and the country needs another spending kick to move the economy out of second gear. All this talk of fiscal doom and gloom, they say, is a conservative technique to scare people and undermine social programs, including Social Security and Medicare.

Conservative economist Kevin Hassett, however, says government spending has skyrocketed under Democrats and that he doesn't take Obama seriously when he says he wants to be fiscally prudent.

"They're attempting to achieve every agenda on the Democratic wish list and then after they've done that, worry about deficits," Hassett said.

Senate mutiny brewing

To keep the debt machinery humming, Congress must raise the statutory debt ceiling within a few weeks. But 13 Senate Democrats have vowed they won't vote to increase the limit unless Congress creates a bipartisan panel that would find ways to cut the debt.

"The longer you wait, the more you diddle, the more draconian the solutions are going to have to be. That's just a mathematical certainty," said Sen. Kent Conrad, D-N.D., a leading advocate for the debt commission.

Congressional leaders and committee chairmen, however, don't want their spending and taxing authorities usurped by a commission. One possible outcome of negotiations between the administration and Conrad's group is that Obama could appoint an advisory panel with no statutory power.

Past fiscal calamities have been solved or moderated. But the politicians who tried to fix the problem often were booted from office. When President George H.W. Bush broke his no-new-taxes pledge in 1990, he torpedoed his re-election chance. Bill Clinton raised taxes in 1993, and Democrats quickly lost control of Congress. Clinton left office with a budget surplus, but that vanished with the George W. Bush tax cuts, two wars and a new entitlement program, the Medicare prescription-drug benefit, that the Republican-led Congress and the White House decided didn't need to be paid for.

The current administration has signaled that it believes the economy comes first, deficits second.

"Right now, it's all about growth and jobs, has to be about growth and jobs," Treasury Secretary Timothy Geithner said recently on CNBC. "And that's the best way to make sure we have the ability to shift to going back to living within our means, bringing down these long-term deficits. That's the basic strategy."

As William Gale of the center-left Brookings Institution put its, "Saving the budget but killing the economy in the process is a Pyrrhic victory."

Tricky act for Obama

Timing is everything. The administration will have to perform one of the great fiscal pirouettes of all time. In the same way that the president has ordered an increase of troops in Afghanistan while also setting a date for the start of withdrawal, he must use the spending power of government to juice the economy while vowing fiscal discipline as soon as possible.

If deficits can become small enough over time — less than 3 percent or so — the natural growth of the economy will make the debt more manageable. No one knows how robust the economy will be in the future, or what kind of crises might drain Treasury resources. Then there's the quirky nature of debt itself: It is not as inert as one might think, but rather exists in a riotous ecosystem of high finance, a tangled network of bills, notes, bonds, fluctuating interest rates, percolating inflation, rising and falling currencies. Any sudden shock to the system can have cascading effects.

Burman, the economist, said he has developed a computer model that shows that a "catastrophic budget failure" is a possibility.

"I try not to get too depressed, because if I really thought it was going to play out the way this model works, I would just move to a cabin in Montana and stockpile gold and guns," he said.